Should You Build to Suit or Lease Your Next Distribution Center?

Should You Build to Suit or Lease Your Next Distribution Center?

As shippers redesign their distribution center strategies to embrace e-commerce, automation, and other trends, the typical short-term response is to lease available space as soon as possible, often at a premium.

A strategic assessment of business needs over the long term could take network planning in a different direction.

Q: What factors should I consider in the build vs. lease decision?

A: Market forces may lead you to secure space in existing facilities in high-demand markets with high rates and even higher escalators. You may end up paying premium rates per square foot for a building that may not suit your needs over the long term.


That option may make sense in some cases if you’re entering a new market or launching new products. But these days, it’s a costly option if you’re bidding against other companies who want access to the same market.

The alternative is a build-to-suit project, often in a lower cost but adjacent market that will ensure the facilities meet your ongoing business needs. The result is a predictable cost structure over a 15-to-20-year lease period. This strategy avoids competitive pricing for high-demand locations.

Q: With inflation and real estate rates rising, is it wise to be locked into a long-term commitment?

A: You can lock in rates now for the long term for a predictable expense base. Although leasing rates may mitigate as supply chains normalize, the rate environment likely won’t return to the level of even a few years ago.

Imagine if you had started a two-year build-to-suit program that is now coming online. Your lease would be much more attractive than current rates. If you start a building project opening two years from now, your rates will be better than spot rates in the open market.

That’s especially true if your business requires a location in an expensive market like Los Angeles. You could lock in rates in LA at the current level and have a building that will suit your needs.

You will avoid paying a premium for existing space that many other companies are bidding on right now. Depending on the lease arrangements, there could be capital and tax advantages for your business as well.

Q: What are the operational advantages of building to suit?

A: Your organization can design the space for your current and future business requirements. If your products are heavy or bulky, you may not need a 30-foot clear space or extensive racking.

If you need rail access or chemical storage capacity, or other specialty requirements, options for move-in-ready buildings are limited. Jumping into a lease for an existing building could mean you’re paying for space you can’t utilize fully, or that won’t optimize your inbound and outbound strategies.